Global Economy to Return to Normal

No matter how many times we repeat how important the emerging economies are to world growth, we still run scared at the thought of any growth slippage in the advanced economies. We will have to train ourselves to react differently.

Latest revisions to the global growth outlook have taken forecasts for 2012 and 2013 lower. The 2013 growth rate forecast by the International Monetary Fund, for example, has dropped from 4.5% in April 2010 to 3.9% in the latest update published a week ago.

In the past few weeks, growth downgrades from both the World Bank and the International Monetary Fund have come with warnings about the potentially catastrophic consequences of European governments failing to come up with a plan to manage their national debts.

At the same time, both groups have acknowledged ways forward for the governments. By issuing the warnings, they will be hoping to prod them along the right path and limit opportunities for the European governments to avoid hard decisions.

The scary scenario sapping equity market strength around the world is one in which the Europeans fail to grapple with their problems, notwithstanding the obvious needs and potential repercussions, and drag the world into a prolonged and deep recession.

On the other hand, they could manage to avert disaster and muddle through by spreading the needed adjustments across as much time and as many countries as they possibly can. In any event, the adjustments to the European economies will be immense. The flow through to other economies everywhere will still reduce growth.

As we enter 2012, consequently, there is no getting away from the pressures and the need for some arduous adjustments over the next several years. The choice appears to be between scary and not quite so scary.

But is the world such a bad place? Even taking account of the latest downward revisions to the growth forecasts of the IMF, global output is thought likely to rise at a faster rate in the coming five years than it did, on average, for the prior 30 years.

This is especially creditable because world population growth will be running at almost one percentage point less than it did prior to 2000.

So, paradoxically, we actually have to choose one of these two scenarios: imminent catastrophe or, if we are able to muddle through, a period of the strongest sustained growth in a generation.

Of course, the possibility of the strongest growth in a generation comes from the strength of growth in the emerging economies. Despite downgrades to take account of the impact of Europe on emerging economy growth momentum, as a group, their growth should stay above 5% and most likely 6% against a long term average of just 4.5%.

So, why the pessimism? Implicitly, markets are suggesting that an extra unit of output coming from the emerging economies is not as worthy as growth coming from the advanced economies.

There are problems measuring the volume of output across national borders with different wage and price levels operating within different exchange rate regimes. That might be a consideration.

Alternatively, we might just not have got used to the idea that the world is a different place as the balance of economic power continues to evolve.

This is especially difficult for US politicians who still aspire to be "number one" and for whom America's best years, according to the rhetoric on the presidential campaign trail, are still ahead. Most likely they are wrong. The world is a dynamic place. And has always been so.

At one point in history, it would have been hard to think of the UK, for example, not being the world's largest industrial economy. It was until the United States overtook it in the 1870s.

Once, only a few decades ago, Japan used to be the growth model to which policymakers in all advanced countries looked covetously. No longer.

Economic historian Angus Maddison has estimated that between 1500 and 1820, India and China together would have been centres of global economic activity accounting for around 50% of global GDP, much more than their share today.

Anyone thinking that the natural order is how things were in the 1980s or 1990s and that future success depends on those conditions being restored could be right. There must be a slight chance of that being true. But, in all probability, they will have got it wrong.

As the geographic composition of global growth continues to change, markets should get used to the idea that the national origin of the growth is of far less importance than its magnitude. We will learn to take it from wherever it comes.

And, even if Europe does nothing better than simply muddle through in the coming few years as it grapples with its debt adjustments, the global growth outlook is one we would have embraced readily in the 1980s and 1990s. The only difference is that it will be coming from much the same places as in the eighteenth century. Finally, a return to normality!

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